The CIS to Abandon the US Dollar

Mikhail Demidenko

Deputy Director of the Centre for Integration Studies

The State Duma was proposed to consider a draft law on the establishment of a single financial market between the CIS member states. Russian banks will obtain direct access to local foreign exchange markets of other member states.

The agreement is expected to provide direct access for CIS resident banks to domestic foreign exchange markets of other CIS countries for interbank translation transactions. The so-called de-dollarisation of payments between the CIS countries has been on the agenda for a long time. For example, the member states of the Eurasian Economic Union (the EEU comprises Russia, Belarus, Armenia and Kazakhstan), according to their preliminary arrangements, can launch mutual payments in national currencies only by 2025-2030.

According to the Russian Central Bank, the share of rouble payments for goods and services between Russia and the CIS countries in Q1 2015 shrank from 64-65% to 56-57% year-on-year, while the share of US dollar payments increased from 28-30% to 34-37%.

Need for a single currency

Experts suggest that, for the initiative to abandon the euro and dollar payments to be effective, the countries will first need to create a new single currency for the CIS.

“In the first place, when getting access to domestic markets, non-resident banks should count on a developed market in payments, without the US dollar. None of the CIS countries has such market today. To put it simply, we need liquidity in the cross rates of “unpopular” currency pairs. In addition, the financial sector needs stable currencies for payment, because high volatility and associated risks threaten the financial stability of counterparties,” Ilya Berezin, Lead Analyst at the Energocapital Investment Group, says. In the current situation, almost none of the CIS currencies can claim this role, he concludes.

“Trading in national currencies is almost barter. If a country has a serious trade surplus it is not very clear where to spend its partner’s currency. Introducing a single Eurasian currency – the altyn– seems to be a more advisable solution,” Aleksandr Razuvayev, Director for Research at Alpari, believes. He thinks that before the altyn becomes a single currency for the EEU countries, it can, over several years, achieve a reserve status within the CIS.

Vladimir Borisov, Head of Treasury Products at Absolut Bank, is convinced that de-dollarisation promote the advancement of national currency markets. He believes that if a positive decision is made with respect to this project we’ll see narrowing quotation spreads and more transactions closed in these currencies.

“The transition to payments in national currencies won’t be easy, but this is necessary to improve the stability of the global financial system and reduce dependence on major countries – the issuers of the dollar and the euro,” Vladimir Borisov says.

In addition, he believes that de-dollarisation can foster improvements in the business climate and the creation of a common payment space with the CIS member countries.

Difficult to quit

At the moment, bankers doubt whether this initiative will bring significant economic benefits. “Participants in foreign trade have no obstacles to making payments in any foreign currencies, except, obviously, the desire for, and assurance as to, the stability of the respective currency,” Gennady Vetrov, General Director and Chairman of the Board at Energomashbank, says. “We do not have active clients from the CIS countries, but we have residents, which trade with these countries. And if the abandonment of the dollar and the euro means the entering into this agreement, this won’t affect them at all – even now they could use, if they wished to, the somoni or the dram in their payments,” he insists.

“We serve clients, whose business is directly or indirectly linked with the CIS countries. At present, a significant portion of such contracts are calculated using the euro or the US dollar. If to abandon the dollar or the euro, foreign trade participants and banks will still compare the rates of national currencies with the rates of freely convertible currencies,” Ivan Dedov, Director of the Financial Markets Department at Baltinvestbank, adds. “However, the liquidity of the interbank and stock exchange markets with respect to trade in CIS currencies will be significantly lower: these markets will be considerably less in terms of their volumes and this will worsen conditions for companies and create conditions for manipulations with foreign exchange rates.” He concludes that such conditions would hardly promote a more active development of the real sector.

Dmitry Kipa, Head of the Research Department at QB Finance, believes that the main risks associated with de-dollarisation are reductions in trade, increases in illegal exports and imports, and lower transaction speeds.

Mikhail Demidenko, Deputy Director of the Centre for Integration Studies at Eurasian Development Bank, states that, before the euro was introduced in the EU countries, in the 1990s, 40-70% of exports and 40-50% of imports were evaluated in the national currencies. He cites the European Commission’s data that the gain resulting from the abandonment of the dealers’ margins on currency translations alone amounts to 0.4% of the member countries’ GDPs a year and reaches 1% in smaller open economies. Risks associated with the exchange rates decrease and this fosters trade and investment, because currency risks are deemed as an equivalent to trade barriers, the expert believes.

According to Rosstat, foreign trade between Russia and the CIS countries in the first six months of 2015 totalled US $32.6 billion, down 38% year-on-year.